Neonode Inc. Q2 FY2023 earnings call

• Licensing revenues were stable due to resolved semiconductor supply chain issues and strong sales from printer and automotive customers.
• Product sales revenues were low due to weaker customer demand and delayed product launches incorporating sensor modules.
• Business updates included touchless elevator control panels gaining traction, especially in Asia and Europe; interactive kiosks with partnerships like MyScript; NXO partnership in South Korea; rugged touch solutions for various industries; and licensing focus on object detection, head-up display obstruction detection, and driver/in-cabin monitoring.
• Intensified marketing efforts with participation in events in China, Europe, North America, and plans to attend CES 2024 and NRF show 2024.

Revenues for the second quarter of 2023 were $1.2 million, a 5% decrease compared to the same quarter last year. Licensing revenues were $1.1 million, an increase of 15% compared to Q2 last year. Product sales revenues were $0.1 million, a 60% decrease compared to Q2 last year. Gross margin for products was 67% in Q2 2023, 11 percentage points higher than the previous quarter. Licensing revenues contributed approximately 91.67% ($1.1M / $1.2M) of total revenues, while product sales contributed approximately 8.33% ($0.1M / $1.2M).

• Adjusting strategies and tactics to improve sales by focusing on key geographical markets and segments, intensifying marketing efforts, and fine-tuning product portfolio.
• Expecting to continue marketing efforts in upcoming events in Europe, North America, and Asia, including CES 2024 and NRF show 2024.

• Forward-looking statements are based on assumptions and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from expressed or implied by these statements.

Q: Great. Thank you so much for that presentation, Urban and Fredrik. All right, I’ll start with some questions from my side. So first an update on automotive. It seems like you’re seeing some strong traction perhaps especially in the head-up display offering. And I just want to ask regarding competition there because I know some of the DMS suppliers, but what do you see as the main competitors for your head-up display offerings? And do they have like similar technology as you or is it a different one?

A: In that area competition mainly comes from the Tier 1s, meaning the head-up display manufacturers. And some of them have prepared similar, you can say similar solution based on infrared technology. Some have tried to use time of flight sensors and cameras. The problem with that is that performance is very, very poor and some of the OEMs leading this new focus on head-up displays have at least in a couple of cases that we are now engaged in, they have disqualified these other solutions, although they were quite simple and cheap. The problem is that they had also quite poor, poor performance. So we are well positioned here with a fairly advanced yet cost effective solution. And I would say that the main competition would come from a camera-based solution and maybe we will see that in the future. But this is non-trivial. And the question is, if the vehicle manufacturer and the Tier 1 really want to add this type of complexity just for this application alone or this feature alone. So we are well positioned and we are mainly competing here with our customers, the Tier 1 suppliers or the head-up display manufacturers.

Q: All right. All right. And is it only the premium segment that you’re seeing interested or is it also the volume segment that you’re seeing?

A: Currently, this is – usually it’s in automotive. It’s mainly something that’s driven by premium vehicle manufacturers. And this is a question about timing I think. And when you do the math and develop the business case, you will also see a clear cost advantage with having only head-up displays compared to having these modern, large normal displays that many manufacturers are now working with for their dashboards. So I think that this will be both for premium for some OEMs that prefer this type of interior design, but also that it can be like a cost advantage for the volume manufacturer. So this is why we are super excited about this opportunity. But let me underline, Jesper that we have equally high hopes for our driver and in-cabin monitoring software platform. And even though we are a late incomer to this market and we have some strong competition, we know this. The type of feedback and that the resonance with many customers is very stimulating and good for us to see. And we hope that we can surprise both our competition and also customers that haven’t met us before in the future with what we can offer here in driver and in-cabin monitoring.

Q: All right, good. And then regarding product sales this is obviously a continuous disappointment for you as you, as you state. Yet – I mean, you continue to invest additional efforts, which is obviously negative for the burn rate. So how do you think about capital allocation in general? And for how long can you permit prolonged efforts in this area without results?

A: Yes. I see your point and I can also confirm that this is something we have been discussing actually for several years and we have kept a close eye on this. We are trying to establish and build up a new business here for touchless or contactless interfaces. And we have a good technology for this, but this is a new market that we are maybe one of the key drivers that are establishing this new market. And that’s always a tough challenge. So it’s a balance. You have to be persistent and you have to invest. But as you say, we cannot do this forever. And indeed we are now taking steps and we will take further steps so that we not only pump in new capital into this without seeing any results. So we are sort of honing and sharpening our strategies here. And we will – within the products business area, we will shift the capital allocation. And clearly during the last quarter also we shifted more into the licensing business. So we have already taking steps in line with what you sort of suggest here. And we will continue to work on those details in the strategy. And we will present updates on this in the next earnings call and also probably we will continue to evolve both regarding our strategy and tactics into next year. So we get the point. We agree. You should never continue blindly to invest in a profit – non-profit business. Of course, we are here to make money and we are very conscious of this. So I ask everyone to stay tuned for updates and I will also want to reassure you and every other person listening in that we are very much aware of this and really working hard on this issue to turn around the products business. And if it doesn’t succeed, yes, we have to think about doing something else clearly. And we certainly appreciate that and we are discussing it in the company and we will get back to you with updates shortly.